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Non-substitutable consumption growth risk

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  • Dittmar, Robert F.
  • Schlag, Christian
  • Thimme, Julian

Abstract

Standard applications of the consumption-based asset pricing model assume that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.

Suggested Citation

  • Dittmar, Robert F. & Schlag, Christian & Thimme, Julian, 2023. "Non-substitutable consumption growth risk," SAFE Working Paper Series 408, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:280967
    DOI: 10.2139/ssrn.3289249
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    References listed on IDEAS

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    1. Xiaohong Chen & Jack Favilukis & Sydney C. Ludvigson, 2013. "An estimation of economic models with recursive preferences," Quantitative Economics, Econometric Society, vol. 4(1), pages 39-83, March.
    2. Julian Thimme & Clemens Völkert, 2015. "Ambiguity in the Cross-Section of Expected Returns: An Empirical Assessment," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(3), pages 418-429, July.
    3. Alexi Savov, 2011. "Asset Pricing with Garbage," Journal of Finance, American Finance Association, vol. 66(1), pages 177-201, February.
    4. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    5. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    6. Delikouras, Stefanos & Kostakis, Alexandros, 2019. "A Single-Factor Consumption-Based Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 789-827, April.
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    More about this item

    Keywords

    Asset pricing; consumption; cross-section of stock returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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